what is a reasonable expectation

[want a good deal]

Okay, I read the stuff that people cant do the math. RE is overpriced, I agree but what is the point it makes sense. What is a reasonable return on rental property? If you buy a condo for $300k what does it have to rent for in order to be a good long term investment? I understand factoring in the prop taxes, hoa, maintenance, repair and also the tax benefit to the owner is very important but what is a general guide to go by.

[jficquette]

If you were to pay cash for a 300k Condo to rent then consider that you could make $15k a year just taking that money and putting it in CD’s.

If $15k is risk free then lets say $30k is min you should make.

Take the $30k and add property taxes, say $4k per year, upkeep, say $2k per year. That means you would have to get $36k per year in rental income. Consider that you will only have it rented for 9 months per year on average then you will need to rent it for $36k/9 or $4k per month. No way you can rent it for that much. For a condo to pay off then you should only pay about $150k for it.

I didn’t include deperication because that has to be recaptured when you sell it so its just a timing issue. Not a real benefit.

When Real Estate returns to what it was in 2000 then I will get interested.

John

[want a good deal]

Thanks for the comments. It doesnt seem like you are factoring in appreciation. Keep in mind I understand we have not bottomed out yet. I came up with $300k because that is what I want to pay for condos that now sell for $400 – $450 and it seems you can rent these out for around $2k a month. It seems like if I can break even and have the tax benefit by renting it out for 9-10 months out of the year that would make sense. Am I confused?

[jficquette]

I don’t have any experience renting houses so I am not really a good person to follow on this. However, I did build houses once and I passed the CPA exam years ago.

Having said that, consider the $2k in rent. That will be about $18k a year less upkeep. Forget upkeep. Why invest $300k for $18k a year when you can get $15k buying CD’s?

Forget apperication. There will not be any for years. Forget the tax benefit because it reduces your basis in the property and you will pay the tax back when you sell unless you do some tax free exchange deal which I don’t understand enough too explain. The tax free exchange stuff only postpones it anyway. I don’t think you can get out of recapturing the depreciation.

John

[want a good deal]

Well I am new to this but I do understand there is a lot more to it that meets the eye. The big tax benefit comes from writing down your investment while you are in a high tax bracket and either cashing out or having solid retirement income when you are in a lower tax bracket. To get to that point is the math equation to make sure you havent over invested in the property to where you negate the benefit down the road. It seems like rental rates will come up a little and property values will or should come down a lot making it a good time to start thinking about rental property. As with everything you should buy when everyone is running for the hills as long as you are well capitalized and have at least 20 years before you retire. I also realize most people on here will probably be running for the hills until values hit 1996 levels but thats not very realistic.

[jficquette]

The problem with the tax is that the tax bill will hit all at once when you sell the property while the tax benefit was gained prorata over the years.

Also consider that with $50 Trillion in unfunded SS liabilities the risk is that the tax rates will be higher in 20 years then lower.

John

[an]

jficquette, would your conclusion change if you financed the whole thing or even only 10% cash? Then wouldn’t it be a good deal getting $18k return a year on a $30k investment?

[NicMM]

Asianautica,

I agree a leverage can be done here. This condo seems a little attractive in this case. But would the market psychology keeps driving the price done?

[NicMM]

Asianautica,

I agree a leverage can be done here. This condo seems a little attractive in this case. But would the market psychology keeps driving the price down?

Also the supply of condo in SD seems huge (I have no number though), as I seem builders have converted rental properties to condo and then built many more new complex. There are several new rental propertied built near I-805 and La Jolla village dr, where is near this property you are talking about. If you get this property, will you have problem renting it out later? That’s my concern about it.

[JWM in SD]

“If you get this property, will you have problem renting it out later? That’s my concern about it.”

Yes, now you are starting to get it. Not only will you have to compete on rent but there will also declining prices to deal with as well. Remember, you would also be competing with SFH rentals inland as well theoretically.

[want a good deal]

Okay, you people are losing touch with the question. It is about what is the right price to buy at vs the rental price of the unit. No particular unit, just rental condos in general. And as far as declining rental prices that may be but there is a level that makes sense. I already own a home and realize its going down before my eyes but I have to have a place to live and so does everyone else. Now I want to know how to profit off those people who want to rent. There will be a price point that makes sense and it will probably be far above what most of you think. If rental property didnt compute out they wouldnt build apartments. Intelligent feedback appreciated.

[Bugs]

I don’t think that “reasonable” has anything to do with pricing. Like the upswing before it, this downswing isn’t going to unwind based on “reason”, but based on immediate supply and demand. Reason is an external unit of measurement of the pricing, not an integral part of it.

If a potential buyer doesn’t at least try to time the market a little bit they run the risk of paying way too much for a property and tying up too many assets in the process. I’m not talking about being greedy or getting it down to the last penny, but just keeping an eye on the supply of listings vs. the rate of sales.

Prices are adjusting right now because we have way too much inventory relative to the current pace of sales. The prices won’t stabilize until that inventory is burned off.

I don’t think there’s any point in establishing a target because on the one hand the trend might not ever converge with your target, and on the other hand the trend might end up racing way beyond it. Whether you buy when the amount of inventory and rate of sales achieves some semblance of balance is going to be dependent on your ability to swing the deal, not on whether the deal itself is reasonable.

[jficquette]

If you can get a condo or single family home cheap enough then it can work. I think that the people who got into rentals 20 years ago are the ones that are setting pretty because the units were bought so much cheaply.

As far as return on investment is concerned I tend to look at it in terms of revenue vs risk. While you only put down 10% cash you have the $270k additional in debt that you owe.

You will also be paying interest on the debt and probably at a higher rate then 5%.

John

[want a good deal]

If I can buy a condo and rent it out and break even after all my expenses then thats a no brainer no matter what the condo will be worth in a year or two. My profit will be the tax savings and eventual profit on the place. As well as preparing for my retirement. I view it as I do my IRA. It will be income for retirement that will be taxed at a lower rate than I pay now. I am in the highest tax bracket so unless they get stupid on taxes, which is a possibility, I will pay less on the profits when I retire. Now its going to have to go much lower to be able to break even on rental property so I dont anticipate buying anytime soon but I think now is the time to do my research and be prepare in a year or two when it is a good time.

[want a good deal]

jf

I am going to pay cash, just like if I put money in my IRA. The only risk is I buy it and cant rent it out. Even then my only losses will be the interest i am losing on the money and the expenses of ownership. Hmmm guess then I will call it my second home!! Always an excuse out there for a bad investment.

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